USTR Launches New Section 301 Investigation Into Legacy Chinese Semiconductors

On December 23, 2024, the White House and the Office of the U.S. Trade Representative (USTR) jointly announced a new investigation under Section 301 of the Trade Act of 1974 (Section 301) to examine Chinese actions allegedly “related to targeting of the semiconductor industry for dominance” and the impact of such actions on the United States and other economies. If USTR finds that China’s actions are “actionable,” meaning that they are “unreasonable or discriminatory and burden or restrict U.S. commerce,” the incoming administration will have an opportunity to impose tariffs on a vast range of products or to take other nontariff measures. Any tariffs could cover any Chinese products but would likely focus on (1) China-origin foundational semiconductors or (2) any product that contains China-origin foundational semiconductors. This Update highlights the key takeaways.

I. The Investigation

Section 301 authorizes USTR to impose tariffs or other import restrictions on foreign products after determining that “an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce.” The new investigation will examine, among other things, alleged actions taken by the Chinese Communist Party or by state-owned or -controlled enterprises, market access restrictions, opaque or discriminatory regulation, labor practices, state financial support, forced technology transfer, cyber intrusions, and cybertheft of intellectual property. According to USTR’s notice of initiation, evidence shows that these Chinese actions have led to significant capacity expansion, artificial price reductions, a protected domestic market, and overconcentration of production in the People’s Republic of China.

The investigation will “initially” focus on China’s manufacturing of foundational semiconductors; the wafers used to create such semiconductors; and integration of legacy chips into downstream products in such critical industries as defense, automotive, medical devices, aerospace, telecommunications, and power generation. Foundational semiconductors are older semiconductors — also called “legacy chips” — that do not require the most advanced manufacturing processes but are still critical to the modern U.S. economy: A wide variety of products ranging from cars to household goods and even defense systems cannot work without them. 

Any decisions on whether China’s policies are actionable and, if so, what remedies to take will rest with the Trump administration. However, the investigation appears to be consistent with President-Elect Donald Trump’s stated policy goals, and it is therefore likely that USTR will eventually impose a new round of tariffs.

II. Four Key Takeaways

A. The Rise of "Competent Tariffs" as a New Weapon in the U.S.-China Trade War

USTR’s notice of initiation emphasizes the presence of foundational semiconductors in a variety of products in critical industries, perhaps hinting that any tariff remedy could include “component tariffs”: tariffs payable on a component included in a downstream product, regardless of the downstream product’s country of origin. If so, the tariffs may target not only Chinese semiconductors but also downstream products that contain such semiconductors, including downstream products produced in such third countries as Vietnam, India, and Germany.

Companies may not fully understand their potential exposure. A recent Department of Commerce report, for example, found that more than 40% of surveyed companies do not even know whether their products include Chinese-origin chips. Determining whether products a company imports from any country contain China-origin legacy chips could be a daunting and potentially expensive task.  

Furthermore, it is not difficult to imagine future Section 301 actions aimed at imposing component tariffs on other kinds of Chinese-origin components. This new landscape will require companies to develop a robust understanding of their supply chain.

B. The Expansion of U.S. Trade Actions Toward China to Include a Focus on Legacy
Technologies

The new investigation highlights a broadening of U.S. strategy beyond limiting China’s access to cutting-edge technology. Past export controls, sanctions designations, and foreign investment restrictions have prioritized items such as high-end advanced computing equipment, novel artificial intelligence tools, and the most recent and sophisticated semiconductors. This investigation’s focus on older chips signals the expansion of U.S. trade controls priorities to cover older but ubiquitous technology as well. (Notably, the Department of the Treasury’s new regulations on outbound investment also target a wide range of technologies, including those related to the design, fabrication, or packaging of integrated circuits. See Sidley’s client alert on this subject here). The new investigation could signal that trade actions aimed at restricting Chinese dominance of supply chains for other types of legacy technologies are forthcoming.

C. Section 301 as a Likely Basis for Trump's Threatened Tariffs

The investigation showcases Section 301 as tool for imposing tariffs. Trump has repeatedly threatened to impose significant and widespread tariffs on allies and enemies alike: Since winning the 2024 election, he has floated a 25% across-the-board tariff on imports from Canada and Mexico, tariffs of more than 60% on Chinese imports, a 100% tariff on the BRICS nations, and unspecified tariffs on EU countries.

These tariffs need a legal basis. Some observers suggest that the President could rely on the International Emergency Economic Powers Act (IEEPA), a Cold War–era statute that grants the President broad power to take trade actions in response to foreign threats to U.S. national or economic security or foreign policy. Indeed, Trump announced his intent to rely on IEEPA for across-the-board tariffs on Mexican goods during his previous term before withdrawing that threat. However, whether IEEPA provides a sufficient legal basis for countrywide tariffs is a relatively untested proposition. IEEPA’s predecessor statute — the Trading With the Enemies Act (TWEA) — was used once in 1971 by President Richard Nixon to impose a 10% tariff on most U.S. imports in response to a “balance of payments” emergency. That use was upheld by the now-defunct U.S. Court of Customs and Patent Appeals. But no President has sought to support across-the-board tariffs using TWEA or IEEPA since — and it is unclear whether courts would uphold such a use today.

Section 301 investigations like this legacy chip action provide a firmer legal basis for the imposition of tariffs. So long as USTR concludes that a foreign country’s actions are “unreasonable or discriminatory and burden or restrict U.S. commerce,” Section 301 explicitly empowers the President to enact tariffs. President Trump famously used a Section 301 investigation as the legal basis for imposing tariffs on imports from China during his first administration. Indeed, the Biden administration continued to rely on and push the limits of Section 301 actions: In December 2024, USTR initiated an investigation that attempts to use Section 301 to enforce international human rights standards for the first time. 

We expect that the new Trump administration will initiate more Section 301 investigations. U.S. companies should therefore familiarize themselves with the ways they can participate in Section 301 investigations to help shape any resulting tariffs and tariff exclusions to match their priorities and should be on the lookout for new investigations as a strong signal of tariffs to come. 

D. China's Response

Whether China will retaliate in response to any tariffs remains to be seen. China predictably criticized the announcement as “obviously self-contradictory” because the United States heavily subsidizes its own chip industry. 

China also argued that the investigation is inconsistent with a 2020 World Trade Organization (WTO) panel ruling that found that Section 301 tariffs on Chinese goods imposed during the first Trump administration violated WTO rules. However, the threat of WTO action is unlikely to deter the new Trump administration’s use of Section 301 or other trade measures. The United States appealed the 2020 panel report “into the void” — indefinitely suspending its legal effect by seeking an appeal to the now-defunct WTO appellate body mechanism. President-Elect Trump helped disable the WTO appellate body in 2020 in part because his administration viewed WTO rules as unfairly accommodating of certain Chinese trade practices. The new Trump administration will be unlikely to support reinstating an international dispute settlement system that restricts its ability to use trade tools like Section 301.

III. Conclusion

U.S. companies that import legacy Chinese semiconductors, or products that contain them, need to develop a response plan now. If USTR determines that China’s policies are actionable, it could impose tariffs on any products from China, although it would likely focus on products that contain legacy semiconductors. Therefore, companies should begin assessing their exposure to potential tariffs by determining whether their products contain legacy Chinese chips. 

USTR is accepting public comments related to the investigation until February 5, 2025. USTR’s Section 301 Committee has scheduled a hearing for March 11, 2025, in which members of the public may request to participate.

Sidley attorneys are closely monitoring developments related to U.S. tariff policy and are available to answer your questions.